Debtor Could Avoid Payment on Debt for Overpayment of Public Benefits Since it was Not in the Nature of Support for her Children

Debtor Could Avoid Payment on Debt for Overpayment of Public Benefits Since it was Not in the Nature of Support for her Children

This case presents the question of whether or not a debt is in the nature of support when it is owed to a governmental unit based on the overpayment of funds that had been disbursed for the purpose of allowing the Debtor to purchase food in support of herself and her two minor children. Within the 90-day preference period, the Illinois Department of Human Services (“DHS”) obtained a payment on just such a debt out of the Debtor’s tax refund. The Debtor sued to recover it as a preference. DHS countered that the payment is protected by § 547(c)(7), which insulates bona fide transfers or payments made on account of debts that are, among other things, in the nature of support (including assistance provided by a governmental unit) of a given debtor’s spouse, former spouse, or child (or that child’s parent). The Debtor urges this court to focus on the fact that the debt owing to the government is a new debt and is separate from the payment of monies to her that gave rise to the debt. The new debt is a return debt for money that should never have been paid in the first place, she argues, and it is not in the nature of support of her children because that debt financially benefits only the government. DHS counters that any such new debt for reimbursement will never directly be in the nature of support of the Debtor’s children. A reimbursement debt owed to the government is in the nature of support, it argues, when it is based on or related to actions by the government that had the effect of supporting the Debtor’s children. Here, that would include the provisioning of funds allowing the Debtor to purchase food for her household.

Beginning in 2009, the Debtor applied for and received Supplemental Nutrition Assistance Program (“SNAP”) benefits from DHS for herself and her two minor children. The applications required the Debtor to disclose the number of persons in her household, which came to three: herself and her two minor children. From October to December of 2009, the Debtor received payments in the total amount of $1,008. Then, from August of 2010 to January of 2011, she received total payments amounting to $2,386. These benefits had been awarded based on a household size of three. Thereafter (in March of 2011), DHS determined that the Debtor had failed to disclose certain income, and, therefore, all of the benefits received had been overpaid, amounting to a total overpayment of $3,394. Payments were made and applied on $1,473 of that amount, leaving $1,921 owing. In 2015, DHS utilized its offset rights to intercept the amount owing for overpayment from the Detbor’s income tax refund. It received the $1,921 owed to it by the Debtor. The Debtor is now trying to recover that amount as a preferential transfer.

Both parties have filed motions for summary judgment. DHS asserts that it fits within the preference exception for payments on debts constituting “domestic support obligations.” It argues that because the debt is for the overpayment of funds used to support the Debtor’s children, the debt is “in the nature” of support of those children under § 101(14A). This line of reasoning finds support in several cases considering the issue of government overpayment of benefits that are deemed to be in the nature of support of the debtor’s children. The Debtor argues that the debt is for the return of value/funds that should never have been paid in the first place, and is, therefore, not “in the nature of support” because the debt owing back from the Debtor to DHS is an independent debt. That debt, she argues, is certainly not for the support of her spouse or children, but rather only benefits the government. This line of reasoning primarily finds support in a great many cases considering the issue of overpayments of child or spousal support by one ex-spouse or child’s parent to another.

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